High Quality Dividend Stocks, Long-Term Plan

The Best DRIP Stocks: 15 No-Fee Dividend Aristocrats

DRIP stands for Dividend Reinvestment Plan. When an investor is enrolled in a DRIP, it means that incoming dividend payments are used to purchase more shares of the issuing company – automatically.

Many businesses offer DRIPs that require the investors to pay fees. Obviously, paying fees is a negative for investors. As a general rule, investors are better off avoiding DRIPs that charge fees.

Fortunately, other companies offer no-fee DRIPs. These allow investors to use their hard-earned dividends to build even larger positions in their favorite high-quality, dividend-paying companies – for free.

Dividend Aristocrats are the perfect complement to DRIPs. Dividend Aristocrats are elite companies that satisfy the following:

Think about the powerful combination of DRIPs and Dividend Aristocrats…

You are reinvesting dividends into a company that pays higher dividends every year. This means that every year you get more shares – and each share is paying you more dividend income than the previous year.

This makes a powerful (and cost-effective) compounding machine.

This article takes a look at the following 15 Dividend Aristocrats that offer no-fee DRIPs. You can watch the video below for more information, or skip to written analysis of each Dividend Aristocrat using the links below the video.

Aflac: Supplemental Health Insurance No-Fee DRIP Dividend Aristocrat

Aflac is the global leader in the supplemental health insurance industry. They provide insurance products to more than 50 million people across the world.

However, the company wasn’t always such a heavyweight. The company has humble roots in Columbus (Aflac stands for American Family Life Assurance Company of Columbus), where the company was founded by the Amos brothers (John, Paul, & Bill) in 1955.

In the 62 years since, the company has grown at a rapid rate. Aflac now has a market capitalization of ~$29 billion, with pretax operating earnings of $4.1 billion in fiscal 2015.

Their business model is simple and repeatable. When a policyholder gets sick or injured, Aflac pays the policyholder cash to help them manage life’s everyday expenses.

Investors will be happy with the geographic diversification that comes with an investment in Aflac. The company first entered Japan in the 1970s, and today that country produces a significantly larger contribution to operating earnings than their original U.S. business.

With such significant operations in Japan, the company is heavily impacted by foreign exchange rate fluctuations. The recent strength of the U.S. dollar versus a variety of global currencies has been a headwind for this stock.

The main measure of profitability in the insurance industry is the combined ratio, which can be calculated as total claims paid divided by total premiums written. A combined ratio above 100% means the company is paying more claims than they are receiving as premiums. Similarly, a combined ratio below 100% means the company is profiting on their insurance underwriting.

Aflac typically maintains a very respectable combined ratio, with 2015’s figure coming in at 66%. This is combined with investment income from the company’s insurance float to create the company’s total net income.

Underwriting strength is very desirable in an insurance investment because it means the company has the ability to make money regardless of the performance of their investment portfolio.

While the company has a strong dividend history, they show no sign of slowing down. Aflac’s management has communicated the intention to raise the dividend again in 2017 – which marks the company’s 35th consecutive increase.

AbbVie: Biopharmaceutical No-Fee DRIP Dividend Aristocrat

AbbVie is a pharmaceutical giant with very globalized operations. AbbVie was created in 2013 when Abbott Laboratories spun-off their portfolio of pharmaceutical products.

Some readers may be curious as to how AbbVie can be considered a Dividend Aristocrat when the company has only existed for four years.

The parent company, Abbott Laboratories, is a Dividend Aristocrat, having paid increasing dividends for 45 consecutive years. AbbVie benefits from Abbott’s dividend history and is thus included in the Dividend Aristocrats Index.

AbbVie has only a single operating segment – pharmaceutical products. The company’s mission statement is summarized in the following slide.

With a forward dividend yield of 4.0%, AbbVie is one of the highest yielding Dividend Aristocrats. They also have a low PE ratio of 17.3, which is even more attractive (11.6) when based on next year’s expected earnings.

On paper, AbbVie appears to be a very attractive investment. Further investigation reveals that the company is facing a unique set of risks which has resulted in its attractive valuation.

Their main drug, Humira, is losing patent protection. These patents have begun expiring in late 2016. Since Humira generates 61% of the company’s total revenue, this is concerning for AbbVie investors.

Fortunately, AbbVie has identified this risk and is responding accordingly. The following slide demonstrates how AbbVie expects a portfolio of de-risked late stage assets will soon dwarf the revenue currently generated by Humira.

The company was founded in 1888, when a pharmacist (Dr. Abbott) began creating his own scientifically formulated medicines with the goal of improving patient outcomes.

Today, Abbott is a behemoth of a company with a $60 billion market capitalization. Their portfolio includes more than 10,000 products for consumers across all stages of the life cycle. And growth has not slowed – the company launched 38 new healthcare products in the last year alone.

Abbott’s operations are well diversified into the following segments for reporting purposes:

Along with a strong record of increasing dividend payments, Abbott has also impressed investors on a total return basis. Shareholders who have owed Abbott since the end of 2005 have seen a 212% increase in their investment.

Abbott Laboratories is also poised to benefit from some positive industry dynamics moving forward.

The global population is growing at a rapid rate. In certain developing economies, GDP is rapidly expanding and Abbott has identified this trend – 50% of the company’s business comes from what they deem as “Fast-Growing Markets”.

The strength of Abbott’s business model is evident in their dividend history. The company has increased their dividend for 44 consecutive years. This means that in 2022, Abbott is on pace to become a Dividend King – elite companies with 50+ years of consecutive dividend increases.

Because of the company’s above-average dividend yield (2.7%), sustainable payout ratio (less than half of adjusted earnings), and attractive valuation, the company is one of my favorite health care stocks today.

HCP, Inc: Health Care REIT No-Fee DRIP Dividend Aristocrat

REITs are legally required to pay 90% of their earnings as distributions. This makes it difficult to grow their business (and dividends) over time, as their proportion of retained earnings is very small compared to other industries. This explains why HCP is the only REIT to be a Dividend Aristocrat.

HCP is able to achieve this feat due to the high quality of their real estate portfolio.

Recently, HCP has decided to make some notable changes to their real estate portfolio. The REIT has also decided to spin off its ManorCare assets as a separate security and legal entity.

This is because of the poor performance of this business segment – ManorCare is barely generating enough cash to cover its fixed expenses. The new entity, Quality Care Properties, will be structured as an independent, publicly-traded REIT.

Looking ahead, HCP is poised to benefit from positive industry dynamics. The aging baby boomer population will create plenty of new customers for this healthcare REIT.

Investors should not expect robust growth from HCP. Between 2006 and 2015, the REIT compounded dividends and funds from operations (FFO) at rates of 3.2% and 5.3%, respectively. While these are respectable growth rates for a REIT, HCP is hardly what I would consider a “high-growth” stock.

Future shareholder returns for HCP will be composed of:

3%-4% dividend increases

4.7% dividend yield

Investors can expect total returns of 7.7%-8.7% from HCP over the long run.

Emerson Electric was founded 127 years ago (in 1890) in St. Louis, Missouri, originally as a manufacturer of electric motors and fans. The company is a member of the blue chip stocks list thanks to its above average dividend yield and 100+ year operating history.

Today, the company has grown to a market capitalization of ~$36 billion and is a very well-known dividend growth stock.

They have increased their dividend for 59 consecutive years – which qualifies them to be one of 18 Dividend Kings, stock with 50+ years of consecutive dividend increases.

Lately, their business has been under pressure. In 2016, they sold their Network Power business for $4 billion. This was a large segment of Emerson Electric, contributing 9% to fiscal 2015 earnings (the last year before the divestiture).

Other concerns for Emerson Electric include geopolitical uncertainty due to the Brexit vote, the strong US dollar (which lowers the value of international revenues), and the continued downturn in commodity prices.

The effect of low commodity prices (specifically oil) on Emerson’s business cannot be understated. While Emerson Electric does not operate directly in the oil & gas business, a significant proportion of their customer base does.

All of this contributed to EMR realizing significant sales loss in fiscal 2016, through each of the company’s geographic segments.

Investors should not be overly concerned. Emerson Electric has a strategic plan to improve business performance. The continued sale of non-core assets means that the company will look dramatically different in the near future.

Source: Emerson Electric 2015 Annual Report

The goal of these asset sales is to focus on the areas which management views as having the highest growth potential.

Emerson’s total shareholder returns will be based on the following:

3%-5% organic revenue growth

2% growth through acquisitions

1%-2% share repurchases

3.4% dividend yield

Long-term total shareholder returns are expected to be in the range of 9.4%-12.4%.

Emerson’s asset sales will leave the company well-posed to realize future growth. They should have no problem in continuing to increase their dividend.

Hormel: Packaged Food No-Fee DRIP Dividend Aristocrat

Hormel is a large diversified producer of packaged foods.

The company can trace their roots back to 1891, when founder George A. Hormel established Geo. A. Hormel & Co. in Austin, Minnesota. Customers loved the company’s fresh pork products, and it wasn’t long before Mr. Hormel was planning nationwide expansion.

Hormel has grown to a $19 billion market capitalization with operations divided into five distinct segments:

Refrigerated Foods (50% of sales)

Jennie-O Turkey (18% of sales)

Grocery Products (17% of sales)

Specialty Foods (9% of sales)

International & Other (6% of sales)

Hormel owns a widely-recognizable portfolio of brands. This includes both non-perishable and refrigerated products.

Hormel’s product portfolio is also well-diversified. This protects the company from any swings in consumer tendencies – for example, if Stagg Chili starts to become unpopular with Hormel’s customers, it should not materially affect their business results as they have many other brands that will likely remain profitable.

Hormel operates in an industry that is very resistant to economic recessions. They also have a strong business model and substantial brand recognition. All of this combines to make Hormel profitable in a variety of business environments.

The following diagram displays how Hormel only experienced a nominal decrease (2.8%) in EPS during the financial crisis of 2008. During all other years, the company was able to expand their bottom line.

The strength of Hormel’s business model is also evident in their dividend history.

Beyond being just a Dividend Aristocrat, Hormel is a Dividend King thanks to its 51 consecutive years of dividend increases.

Looking ahead, one potential performance detractor for Hormel’s stock is the company’s current valuation. Since 2000, the company has had an average PE ratio of 18. The company currently trades for 22 times TTM earnings.

Shareholder total returns for Hormel will be composed of:

4%-6% organic revenue growth

2% revenue growth from acquisitions

1% margin improvements

1% share repurchases

2% dividend

Which means Hormel shareholders can expect total returns of 10%-12% in the long run. Valuation contractions may reduce these returns.

EcoLab: Clean Solutions No-Fee DRIP Dividend Aristocrat

Ecolab is the largest publicly-traded company in the cleaning products industry. Their name stands for Economics Laboratory, which reflects the company’s focus on saving customer’s time, energy, and money.

Since their humble beginnings in Saint Paul, Minnesota in 1923, EcoLab has grown into a diversified global business with a market capitalization of $34.6 billion. The company’s vast size and scale is outlined in the following slide.

EcoLab as a company has performed admirably in times of economic recession. Due to the company’s necessity-based products, they did not experience a single year of negative earnings growth during the global financial crisis.

Their business strength is also evident in their dividend history. Ecolab has increased dividends every year since 1985.

Total returns for Ecolab shareholders will be composed of:

7%-9% EPS Growth

2% dividend yield

Long-term shareholders will be rewarded with high single-digit or perhaps low double-digit returns. Ecolab’s current valuation is in line with its historical average, so valuation changes should not be a significant factor in expected returns.

The company’s solid growth prospects and shareholder friendly management have attracted the attention of the world’s richest man. Bill Gates’ portfolio includes Ecolab as a core holding.

While the company doesn’t offer much in the way of current income with its dividend yield of 1.2%, it ranks well using The 8 Rules of Dividend Investing because of its fantastic historical rate of dividend growth and its typically low payout ratio (around 30%).

ExxonMobil: Oil Giant No-Fee DRIP Dividend Aristocrat

ExxonMobil is the largest oil company in the world based on market capitalization. ExxonMobil’s current market cap is $367 billion, which is much higher than the next largest (Royal Dutch Shell at $263 billion). The company is the largest of the oil and gas ‘supermajors‘

ExxonMobil has a very storied history, going all the way back to its original parent company: Standard Oil.

Standard Oil is one of the amazing success stories of American business, and was eventually split up into many smaller companies on the ground of antitrust concerns. These smaller companies include ExxonMobil and Chevron (CVX). Both of these companies are now Dividend Aristocrats.

Lately, ExxonMobil has struggled. The company continues to operate in a business environment where their main commodity (crude oil) is experiencing a dramatic price decline.

Throughout this downturn in commodity prices, ExxonMobil has maintained profitability when many of their smaller competitors have been run out of business. The following diagram outlines how ExxonMobil has used their cash through the first three quarters of fiscal 2016.

ExxonMobil has two main competitive advantages it can use to drive business growth. These are their massive scale and their expertise in operational efficiency.

ExxonMobil’s massive scale provides much-needed diversification in their business model. The company operates an upstream, downstream, and chemical segment. These businesses complement each other well, since each segment reacts differently to downturns in oil prices.

The company’s expertise in operational efficiencies allowed management to aggressively cut costs during the current downturn in oil prices. This is one of the major reasons that ExxonMobil has maintained profitability.

Looking ahead, the company’s total shareholder returns will be composed of:

4%-6% EPS growth

3.4% forward dividend yield

Giving investors total returns of 7.4%-9.4% over the long run. As I’ve mentioned, the company’s returns over the next few years will likely be higher as commodity prices normalize themselves, and ExxonMobil restores their past levels of EPS.

Genuine Parts Company: Auto Care No-Fee DRIP Dividend Aristocrat

Considering that GPC is a large, blue-chip company with a market capitalization of $14.3 billion, it is surprising that it is not more of a household name.

Investors might be more familiar with the company’s automotive segment: NAPA Auto Parts.

GPC also owns other operating subsidiaries, each of which holds #1 or #2 market share in their respective category:

GPC has a very strong business model. Regardless of economic conditions, car repairs will still be required, which drives demand for GPC.

The strength of GPC’s business is evident in their dividend history. The company has raised dividends for 60 consecutive years – one of the longest active streaks of any businesses. This more than qualifies them to be a Dividend King – companies with 50+ years of consecutive dividend increases.

Over the long-run, GPC aims to compound EPS at a rate of 7%-10%. Combined with their current dividend yield of 2.7%, investors can expect total shareholder returns in the range of 9.7%-12.7%.

More recently (2007-2012), the company was finding it increasingly difficult to grow using this acquisition-based strategy. The company was becoming complex and fragmented, which was not ideal in the increasingly competitive global environment in which they operated.

This led to the company’s new enterprise strategy, which is outlined in the following diagram.

The company is confident that their new strategy will result in a business turnaround. ITW expects significant growth across each one of its product categories. This growth is expected to be above-market in every case.

Over the long run, ITW expects the following drivers of shareholder returns:

5% organic revenue growth

4%-5% margin improvements

1%-2% share repurchases and acquisitions

~2% dividend yield (currently at 2.1%)

Which will lead to long-term shareholder returns of 12%-14%. Valuation contractions might be a headwind for shareholder performance – ITW’s current PE ratio of 22.9 is significantly higher than its long term historical average (average PE of 16 since 2000).

Johnson & Johnson is a large healthcare company with a storied history.

The business can trace inception back to 1886, when three brothers (the Johnsons) published “Modern Methods of Antiseptic Wound Treatment,” which quickly became the industry standard.

Fast forward to today, and Johnson & Johnson is a healthcare giant. They operate in more than 60 countries and employ more than 125,000 people. More than 260 subsidiary companies fall under the umbrella of the Johnson & Johnson Family of Companies.

Their operations are broken down into the following segments:

Pharmaceutical

Medical Devices

Consumer

The contribution of each of these operating segments to Adjusted Income Before Tax is outlined in the following diagram.

The strength of Johnson & Johnson’s business model is evident in their dividend history. The company has increased dividends for an incredible 54 consecutive years. This makes Johnson & Johnson a member of the Dividend Kings.

This business strength has also translated to the company’s bottom line. Over the past 10 years, Johnson & Johnson has compounded EPS at a rate of 3.8%. More impressively, 2015 marked the companies 32nd consecutive year of positive earnings growth. The predictability of Johnson and Johnson’s business has rewarded shareholders with an exceptionally low stock price volatility.

Looking ahead, total shareholder returns for JNJ will be composed of:

6%-8% earnings-per-share growth

2.7% dividend

Leading to total shareholder returns of 8.7%-10.7%. This is before the effect of changes in valuation multiples.

While there are many Dividend Aristocrats in the Industrials sector, one could argue that none are impressive as 3M. The company has very humble roots, starting out in 1902 as Minnesota Mining & Manufacturing.

Thanks to a very strong track record, 3M now owns a diverse array of products & brands. With over 100,000 patents and a market capitalization of $107 billion, the company is a juggernaut in the industrial manufacturing sector.

In 2015, the company had $30.3 billion in sales, divided into the following operating segments:

Similar to Johnson & Johnson, 3M operates a tremendously resilient business model. This has allowed them to steadily increase their dividend payments, year after year – for 58 years in a row, to be precise. This means that 3M is a member of the Dividend Kings.

3M’s long-term financial objectives are outlined in the following diagram.

Which will lead to total shareholder returns of 10.5%-13.5% over the long run.

Sherwin-Williams: Coatings No-Fee DRIP Dividend Aristocrat

As the largest producer of paints in the United States, Sherwin-Williams sells branded coating products under many well-known brand names. These include (among others):

Sherwin-Williams

Dutch Boy

Krylon

Minwax

Thompson’s Water Seal

The company can trace its roots to 1866 in Cleveland, Ohio, where it was founded by Henry Sherwin and Edward Williams.

Today, the company’s operations are divided into four operating segments:

Paint Stores (64% of sales)

Consumer: (15% of sales)

Global Finishes (17% of sales)

Latin America (4% of sales)

Clearly, the Paint Stores segments is the most important for Sherwin-Williams. This is not surprising given that the company owns and operates more than 4,100 stores.

Source: Sherwin-Williams Investor Presentation

By many standards, Sherwin-Williams track recorded is nothing short of remarkable. The company has raised dividend for 37 consecutive years and has compounded EPS at a rate of 10% over the past decade (from $4.19 in 2006 to $11.16 in 2015).

The company is making strategic changes to ensure future growth. Namely, they are focusing more on international markets as a source of future earnings growth. This is in alignment with the global paints and coatings market – North America contributes only 19% to global demand for Sherwin-Williams’ products.

Source: Sherwin-Williams Investor Presentation

Because of the company’s recent growth, they trade at a premium valuation multiple (current PE of 23.3) compared to their historical averages (Sherwin-Williams’ PE ratio has traded in the teens for much of the last decade).

It is difficult to say whether these elevated PE ratios will persist – it could be that the market is finally recognizing Sherwin-Williams as a high quality company, and these elevated multiples have emerged as a result.

Looking ahead, total returns for Sherwin-Williams shareholders will be composed of:

8%-12% EPS growth

1.2% dividend yield

For expected total returns of 9.2%-13.2% before changes in valuation multiples.

S&P Global: Financial Data No-Fee DRIP Dividend Aristocrat

S&P Global was recently renamed after previously being known as McGraw Hill Financial. Although their name has changed, their business remains the same as ever.

Their operations are broken down into the following divisions:

S&P Global Ratings

S&P Global Market Intelligence

S&P Dow Jones Indices

S&P Global Platts

Revenue and operating profit by segment are broken down in the following diagram.

Historically, many of S&P Global’s total returns have been driven by the shareholder-friendly behavior of the company’s management. Since 2012, the company has returned ~$6 billion to their shareholders through a combination of dividends, stock repurchases, and a one-time special dividend in 2012.

Looking ahead, S&P Global seems well-poised to generate further shareholder returns. The company is able to grow earnings at a high rate due to their consistently high profit margins. They will also benefit from a global investor base that is rising in sophistication. Investors are increasingly aware of the effect of fees on investment returns, and this has led to more demand for financial information.

S&P Global also benefits from operating in an oligopoly. The company is one of only three many debt rating agencies, along with Moody’s and Fitch Ratings.

The company’s issues have been caused by the rise in imported steel. This has dramatically affected Nucor’s earnings. Consider the following:

Nucor 2006 EPS: $5.73

Nucor 2015 EPS: $1.11

What is even more troubling is that Nucor’s 2015 earnings were not sufficient to cover their dividend payments. This resulted in a payout ratio above 100%, which if sustained will inevitably lead to a dividend cut from this company.

This means that Nucor is certainly riskier than your typical Dividend Aristocrat. This was evident during the global financial crisis of 2008-2010, when the company actually posted a net loss of $0.94 per share during fiscal 2009.

With all this in mind, it is unlikely that Nucor would survive a prolonged economic downturn with its dividend intact.

The company is also overvalued compared to its historical averages. Since 2000, the company’s average PE ratio is 14. Today’s PE ratio is 37 on a TTM basis. Valuation contraction will inevitably be a headwind to shareholder returns unless the company can return earnings to their previous levels.

With all this in mind, now might not be the best time to initiate a position in Nucor. I expect low (or even negative) returns for this company moving forward.

Final Thoughts and Additional Resources

Enrolling in DRIPs can be a great way to compound your portfolio income over time. That being said, I prefer to selectively reinvest my dividends into my current best investment idea. This ensures that DRIPs don’t automatically purchase stocks that I view as overvalued.

Several additional resources are listed below for investors interested in further research for DRIP plans.

For dividend growth investors interested in DRIPs, the 15 companies mentioned in this article are a great place to start. Each business is very shareholder friendly, as evidenced by their long dividend histories and their willingness to offer investors no-fee DRIP plans.

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